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  • CFO.com | US

Offshoring’s Uncertain Future in 2009

Outsourcers insist their business will continue to grow even as the industry deals with a major scandal. Another problem: some of the industry's biggest customers — financial services firms — are hurting.

Outsourcing experts and providers are hoping the down economy will give them an up side: Companies needing to make drastic cuts could see a solution in replacing costly full-timers with contractors working in countries that provide lower wages.

Some say it’s already happening. Consero Global Solutions, which outsources finance and accounting work to India for small businesses, claims its revenue grew 90 percent last year compared to 2007, partly because of the financial turmoil.

At the same time, though, current events have made some businesses, particularly financial services firms, pull back from outsourcing as they put discretionary projects on hold. Others may think twice about signing new long-term contracts if the $1 billion accounting scandal at Satyam Computer Services makes them more jittery about entrusting foreign third parties with sensitive data.

Trust has been one of the sticking points in the outsourcing industry’s drive to make its business in back-office services rival that of its technology offerings’ fortunes. Although so-called business-processing offshoring has grown in recent years, some companies have been wary of sending finance and accounting jobs in particular overseas.

The controls-conscious attitude adopted after Enron’s collapse might have been given a fresh impetus this week following the news that the founder of Satyam, the fourth largest software-services provider, admitted conducting a years-long accounting fraud from the company’s Hyderabad, India, headquarters. The fallout has put the technology contracts signed by such well-known U.S. companies as Cisco Systems and General Electric at risk. India is, of course, the nation that holds the bulk of offshoring’s market share.

Sunil Subbakrishna, a partner in the strategic IT and operations practice in Oliver Wyman’s financial services group, says the fraud “is a cause for concern” but does not imply that other people besides founder Ramalinga Raju were involved with the scheme. Nor does it implicate any other outsourcers in India, he added. Phil Fersht of AMR Research added that Satyam will likely be acquired soon by another Indian company that will make good on the existing contracts.

Still, users of service providers are worried. Yesterday, EXL Service, a New York company that provides BPO work in India and the Philippines, received several calls from clients requesting reassurance about EXL’s governance polices and procedures. When customers sign up for a three, five, or even 10-year contract, they want to know “their service provider will continue to provide such services over a long period of time,” Rohit Kapoor, the company’s chief executive officer, told CFO.com.

Also working against the offshoring industry’s hope for high growth this year: the possible policies of the incoming Obama administration. The president-elect’s campaign platform focused heavily on not moving more jobs overseas, and he has vowed to revisit tax advantages for companies that do offshore work. Advocates of outsourcing say the practice has not proven to directly correlate with job loss in the United States.

For now, observers are taking a positive outlook and say the offshore outsourcing industry will see an uptick toward the end of this year and into 2010. “We’re in a temporary plateau right now, but we expect to see a big wave coming,” says Subbakrishna.

Subbakrishna expects to see increased business from financial institutions. Last year was another story: The number of outsourcing contracts worth more than $25 million signed by global financial services firms declined by 19 percent last year compared to 2007 and their total value decreased by more than 25 percent, according to data compiled by outsourcing advisory firm TPI that will be used in an upcoming report.

Kapoor says financial firms want more reconciliation, regulatory, and corporate governance help. He saw the increased demand one year ago as financial institutions, knowing they’d be under increased regulatory scrutiny, added more assurance checkpoints to their various transactions and are offloading the additional work to outsourcers. Other service providers say they’re getting new types of clients: Ariba Inc., a Sunnyvale, Calif.-based company that provides procurement services, for example, has seen increased interest from regional banks, CFO Ahmed Rubaie told this website.

Subbakrishna acknowledges that financial institutions’ CFOs currently have other issues on their plates than changing their staffing strategy. “There are companies worried about their existence and survival,” Subbakrishna says. “Their focus on the short term is shoring up their capital base and making sure they survive through the crisis.”

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